Keystone foes try to stop oil sands exports by rail

Environmentalists opposed to the Keystone XL pipeline are expanding their fight against imports of Canadian heavy crude oil by trying to block rail projects that offer another way for it to enter the U.S.

“Debating rail or pipelines is like debating which kind of poison you want,” Daniel Kessler, a spokesman for 350.org, an environmental group, said in an interview. “There is a substantive effort under way in many places to block rail.”

Environmental groups including 350.org oppose Keystone because they say it would promote development of oil sands, a type of crude that releases more greenhouse gases in its production and refining than other forms of oil. Canada, the biggest foreign supplier of oil to the U.S., has lobbied hard for the pipeline to promote growth of its energy industry.

The use of trains to carry crude is increasing in both the U.S. and Canada as production outstrips the capacity of pipelines to transport the bounty. In Canada, producers are rushing to secure rail cars while U.S. President Barack Obama reviews Keystone, a $5.4 billion pipeline TransCanada Corp. wants to build to link the oil sands in Alberta with refineries on the U.S. Gulf of Mexico.

Shipping the Alberta oil by rail benefits lines including Canadian National Railway Company, the Canadian Pacific Railway Ltd. and Burlington Northern Santa Fe Corp., a unit of Warren Buffett’s Berkshire Hathaway Inc.

Terminal Projects

Opponents of oil sands are targeting rail terminal projects in California, Washington state and elsewhere and pushing federal regulators to mandate expensive retrofits to tanker cars that could impede efforts by producers to expand their fleets. The campaign represents a threat to Canadian oil, which together with natural gas is Canada’s largest export to the U.S.

Oil sands critics are already having some success. The Shorelines Hearings Board, which oversees construction along Washington state’s coast, last week blocked permits for two crude terminal projects at Grays Harbor and called for additional study of the environmental risks of increasing ship and train traffic.

Kristen Boyles, a spokeswoman for Earthjustice, said one concern voiced by critics was that the terminals would receive oil sands products, which can be harder to clean up in a spill than conventional crude.

Displacing Shipments

Valero Energy Corp.’s plan to build a terminal at its Benicia, California, refinery to off-load crude has been delayed as city officials seek an environmental review.

While the company isn’t saying what type, groups including 350.org and the Natural Resources Defense Council say it will probably include some fuel from the oil sands.

Bill Day, a spokesman for San Antonio-based Valero, said the project would make the refinery more competitive by giving it access to cheaper fuel. Its two California refineries lost $78 million in the last quarter, the weakest performers among the company’s 13 plants in the U.S., he said.

Day said the project wouldn’t increase emissions, as some critics have claimed. By displacing the need to ship oil into the refinery, the plan may improve area air quality, he said.

The campaign against the plan is “misguided,” Day said.

In Washington state, the San Francisco-based Sierra Club is urging Governor Jay Inslee to block a joint proposal from Tesoro Corp., a San Antonio-based refiner, and Savage Companies, a Salt Lake City-based logistics company, to build a rail terminal in Vancouver, Washington.

‘Environmentally Responsible’

That proposed facility is expected to mostly unload light sweet crude from North Dakota, though it also may handle some tar sands fuel, said Kate Colarulli, deputy director of the Sierra Club’s Beyond Oil campaign.

Kelly Flint, Savage’s general counsel, said the company was confident it would convince regulators the facility “can be built safely and in an environmentally responsible manner.”

A draft environmental review released by the U.S. State Department in March found that Keystone wouldn’t impact climate change in part because trains would pick up the slack if the pipeline wasn’t built. Environmental groups have spent the months since trying to discredit that finding. Rail lines, they argue, are a complement, not a replacement, to the pipeline.

Keystone could carry 830,000 barrels of oil a day to U.S. refiners. By comparison, an average of 175,000 barrels of oil were imported by rail each day this year, about 75,000 barrels of it heavy oil, according to the Canadian Association of Petroleum Producers. About 45,000 barrels of oil was shipped to the U.S. daily on average in 2012, according to the group.

Bottleneck Possible

Rail proposals in western Canada could load as much as 450,000 barrels of heavy oil a day by the end of 2014. An insufficient number of tank cars could create a bottleneck through at least next year, Goldman Sachs Group Inc. said in a report in October.

While oil sands growth “could be temporarily deferred in the event that Keystone XL is not approved,” rail could “significantly mitigate the impact of a negative Keystone XL decision,” according to a September report from the Royal Bank of Canada.

Philip Verleger, an energy economist based in Colorado, said environmental groups will have a harder time blocking rail projects because many are expansions of existing facilities or would be built in industrial sites and face fewer regulatory hurdles.

Projects on the West Coast will probably take more light sweet crude than Alberta bitumen, while facilities planned in North Dakota and Louisiana, two oil states, probably will have broad community support, he said.

Stop Construction

“They will try to slow it down,” Verleger, once an energy adviser to former President Jimmy Carter and founder of the consulting firm PK Verleger LLC, said in an interview. “But I would be surprised if they could stop the construction of a well-thought out rail facility.”

More than 2.9 million barrels of oil a day entered the U.S. from Canada by all methods last year, according to the Energy Information Administration.

The growing use of rail to carry that oil also drew a warning yesterday from TransCanada, Keystone’s sponsor, in an unusual instance of agreement between the Calgary-based company and its environmental critics.

Girling Warnings

Russ Girling, the company’s chief executive officer, told investors on a conference call that the increase in rail movement puts the “public safety at risk.”

Alexander Pourbaix, TransCanada president of energy and oil pipelines, said on the same call that total rail capacity in Alberta could reach 800,000 barrels a day by the end of 2015. That shows, he said, that the oil sands will be developed with or without Keystone.

Even as they argue the State Department analysis exaggerated rail capacity, 350.org, the Sierra Club, Natural Resources Defense Council and other groups are stepping up opposition to rail projects that could also promote oil sands development, if on a smaller scale than Keystone.

“The strategy behind stopping these tar sands and other dangerous forms of oil is to strand the asset,” Colarulli said in an interview.

Pipelines, ports and rail terminals “are all necessary parts of the network to move tar sands globally,” she said.

Tanker Rules

Oil sands production will increase from 1.8 million barrels in 2012 to 2.3 million barrels in 2015 and 4.5 million in 2025, according to the Canadian producer group, whose members include a unit of Exxon Mobil Corp.

Groups are also taking the fight to Washington where the Department of Transportation is reviewing new safety rules for train cars that carry flammable liquids like crude oil.

The derailment and explosion of a crude-filled train in Lac Megantic, Quebec, that killed 47 people last July brought greater awareness of the risks. They were further underscored earlier this month when a train carrying oil crashed in Alabama, sparking a fire that burned for days.

The Pipeline and Hazardous Materials Safety Administration, part of the Transportation Department, is reviewing whether to require cars that carry oil and ethanol to be upgraded to better withstand accidents.

Requiring the retrofitting of thousands of older cars means manufacturers probably won’t have the capacity to build new cars to carry heavy crude from Alberta, said Anthony Swift, an attorney at the Natural Resources Defense Council.

“The cost of leasing remaining tank cars will increase –- increasing the costs of moving crude by rail,” Swift said in an e-mail. “This is particularly problematic for tar sands producers, as they don’t have the margins to support even minor costs increases.”